House Approves Omnibus Tax Bill

With less than two weeks remaining in the regular 2015 legislative session, a conference committee has yet to be appointed to negotiate the two bills.
(Published May 4, 2015)

Note: Please read an update on the omnibus tax bills.

After nearly seven hours of floor debate on April 29, the full House of Representatives approved the omnibus tax bill (HF 848) on a vote of 74-58 with only one minor amendment.

Despite attempts to amend the bill on the House floor, the bill continues to include deep cuts to local government aid (LGA) for Minneapolis, St. Paul, and Duluth and an onerous reverse referendum requirement for general operating levies for cities with populations over 500 and for all counties.

On a positive note, the bill includes the League-supported simplification of the sales tax exemption for construction materials purchased by contractors for public facilities and projects, and a version of the League-supported bill that would allow for the use of tax increment financing (TIF) for market-rate workforce housing projects.

The bill was sent to the Minnesota Senate, where the Senate will amend the bill with the language in SF 826, the Senate omnibus tax bill. The Senate version includes several League-supported provisions, including a $21 million increase in the LGA appropriation for the 2016 distribution, an additional $24 million increase for the 2017 LGA distribution, an earlier distribution of LGA payments, and workforce housing TIF and tax credit provisions. The Senate bill does not include the construction material sales tax exemption simplification sought by the League. (Read related article.)

With the significant differences between the House and Senate bills, a conference committee will be appointed to iron out the differences.

The session must end by May 18, and the late processing of the tax bills leaves less than two weeks for the House, Senate, and Gov. Dayton to reach an agreement on a final tax bill.

What’s in the House bill?
The following is a brief summary of items of interest included in the House omnibus tax bill.

Economic development
The bill includes a version of the League-supported workforce housing TIF authority for cities located outside the Twin Cities metropolitan area. To qualify for the authority, a city must meet the following requirements: an average vacancy rate for rental housing in that city or any other city within 15 miles that is 3 percent or less for at least the last two years; a business in the city or within 15 miles of the city that employs 20 or more full-time equivalent employees must provide a written statement that the lack of available rental housing has made it difficult to hire employees; and intention of the city to use increments to develop workforce housing.

The bill also includes a provision that allows the higher income limits under the Minnesota Housing Finance Agency (MHFA) Housing Challenge Program to be used for housing TIF districts, if the project receives an MHFA grant or loan. Similarly, if the project receives a grant from the Department of Employment and Economic Development for workforce housing, the income limits under the grant, if any, would apply instead of the limits under the TIF statute.

The bill contains a number of clarifying and minor changes in the TIF statute, as requested by the League of Minnesota Cities Development Finance Task Force. These changes would expand the ability of taxing authorities to use increment to pay for necessary operation and maintenance of properties within TIF districts, and clarify when and whether interfund loan resolutions are needed for interfund loans. The language was drafted with significant input from the state auditor and legislative staff, and strike a balance between increased flexibility and transparency.

Special law TIF changes for to the cities of Cottage Grove, Eagan, Richfield, St. Paul, and Wayzata are also included.

Local government aid
The bill does not increase the LGA appropriation beyond the current law $2.5 million appropriation increase for the 2016 distribution. The bill places a permanent per capita limit on the LGA distributions to first class cities. As a result, Minneapolis, St. Paul, and Duluth would see cuts totaling roughly $85 million from the total currently received by those cities. In the Ways and Means Committee, the bill was amended to slightly accelerate the annual distributions of LGA to cities over 80,000 in population to provide those cities with roughly 21 percent of their July distribution in June. The acceleration affects Minneapolis, St. Paul, Rochester, Duluth, and Bloomington.

Property taxes
The bill includes new requirements that local government referenda, including those by cities, must be conducted on the first Tuesday after the first Monday in November of even- or odd-numbered years, to coincide with the annual general election date. This requirement does not affect special elections of people to office and provides a League-suggested exception for a referendum to finance a local government’s response to a disaster or emergency. These elections could be held on another date.

The bill also adds a new general levy referendum requirement that allows citizens to petition for a referendum if a county or city with a population of 500 or more increases its property tax levy in any year. The referendum would be triggered in the year following the levy increase, and if voters do not support the increase, the city’s levy would revert to the level two years prior, with some exceptions for debt service.

The bill also includes a provision that allows for a reverse referendum on whether a city (excluding first class cities), county, or urban town may enter into a lease of three or more years for real property with a housing and redevelopment authority, port authority, economic development authority, or other entity established by special law with powers similar to those authorities.

For businesses and cabin owners, the bill includes an exemption for the first $500,000 of each commercial-industrial parcel and the first $200,000 of each seasonal-recreational (cabin) parcel from the state general levy. The exemption is coupled with a reduction in the state property tax levy so that the cost is not shifted to other properties. The first-year cost of the exemption and related state property tax levy reduction is $135.5 million.

The bill also completely phases out the remaining state general levy over seven years. The fiscal year 2016-2017 biennial cost of the exemption mentioned above and the phase-out of the state property tax levy is more than $400 million.

The bill would move the proposed levy certification deadline for special taxing districts to Sept. 30 to be consistent with cities, counties, and school districts. This League-sponsored change was included in HF 457 (Rep. Jon Applebaum, DFL-Minnetonka).

Finally, the bill allows a portion of state general levy revenues to be paid to a municipality having a net fiscal disparities contribution exceeding 8 percent of its tax base, if the municipality is within the metro area but outside the transit taxing area. This provision is related to HF 135 (Rep. Joyce Peppin, R-Rogers) at the request of the city of Rogers to limit its fiscal disparities contribution to 10 percent of the city’s net tax capacity.

Sales and use taxes
The bill includes the League-supported sales tax exemption simplification for purchases of construction materials made by a contractor, subcontractor, or builder under a lump sum contract for buildings and facilities used directly by local governments. Under the exemption, the contractor, subcontractor, or builder must pay the sales tax at the time the materials are purchased, and the owner of the facility must apply to the Minnesota Department of Revenue for the refund. Effective for sales and purchases made after June 30, 2015.

The City of Mora received a sales tax exemption for construction materials, supplies, and equipment used in the municipally owned wastewater treatment facility. Exempt materials must be purchased between Jan. 1, 2015 (before the effective date of the general exemption above) and Jan. 1, 2017. The exemption applies to purchases by the city, or a contractor, subcontractor, or builder; however, the tax must be paid at the time of the purchase of the materials, and the city must apply for the refund. Money is appropriated from the general fund to pay the refund.

The bill also includes a provision that provides a sales tax exemption for sales at and admissions to a city-designated annual celebration to promote community spirit. To qualify for the exemption, the following conditions must be met:

  • City population of less than 10,000.
  • City celebration must last no more than five consecutive days.
  • The event must be run by the city or a nonprofit organization designated by the city.
  • All receipts from the event are accounted for by the city or nonprofit.
  • The entire proceeds, minus expenses, must go to the city or one or more 501( c )(3) or 501( c )(4) organizations, and be used strictly for charitable, educational, civic, or governmental purposes.
    The exemption does not apply to events involving bingo or gambling activities, and all sales become taxable if the requirements listed above are not met. Effective for sales after June 30, 2015.

Finally, the bill includes an exemption for purchases of construction materials and supplies and equipment incorporated in the improvement of an existing structure at a resort or a private or public campground. The structure may be a cabin or any other structure for use by the resort guests or the campers. The exemption does not apply to construction of new buildings. This would apply to materials regardless of whether purchased by the resort or campground owner or a contractor, subcontractor, or builder. Effective for sales and purchases made after June 30, 2015

The bill also includes:

  • Local sales tax authority modifications for the cities of Duluth, Mankato, North Mankato, and Proctor; retroactive validation of existing local taxes for the cities of Marshall and Proctor; and a new local sales tax for the City of Walker.
  • A prohibition on the expenditure of funds by the state, Metropolitan Council, city, or county on the intercity (Zip Rail) passenger rail project between Rochester and the Twin Cities. In addition, use of eminent domain for the project is prohibited, and a security bond or similar protections are required if the state leases public property to the private developers of the project.
  • The appropriation for border city enterprise zones is made permanent, and the appropriation is set at $1 million per year. The City of Taylors Falls is added to the program for fiscal year 2016.
  • An authorization to the state auditor to arrange for preparation of financial reports for a county, city, or township if they don’t file reports on a timely basis. The state auditor may charge the local government 105 percent of the cost of the service, up to the local government’s aid amount. Also allows the state auditor to delay or waive reporting requirements in the case of a disaster or emergency. This section is related to the LGA penalty forgiveness provisions below.
  • A provision that waives the LGA penalty for the City of Oslo, provided that the state auditor certifies that the city filed its 2012 financial reports by Dec. 31, 2013.
  • A provision that waives the 2014 LGA penalty for any city that lost all or part of its calendar year 2014 LGA payment as a penalty for not filing its calendar year 2013 financial reports with the legislative auditor in a timely fashion. The penalty is only forgiven if the city has filed both its calendar year 2013 and 2014 financial statements with the auditor by June 1, 2015. There are three cities that are known to qualify for this waiver: Woodstock, Jeffers, and Dundee.

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